The pandemic hits hard the South African’s Real Estate Investment Company – NEPI ROCKCASTLE. Already a loss maker of more than EUR 200 million at the end of last year, in 2021 Nepi is fooling his stakeholders with a fake profit


Reporter Finweek: In the previous interviews we talked about the situation with the Romanian malls and the monopoly of the largest real estate investor in this country – according to the value of his assets, Nepi Rockcastle.

 Also, during the analyses performed with your help, we have made a financial overview over all the companies operating in Romania under this brand – Nepi Rockcastle.

Behind this title of large investor are the financial figures, which, as we could see, do not reveal such a great view as the one exposed by the company in its reports and press releases.

 To refresh the memory of our readers, you can find this analyses and previous comments about this Group, in the articles below:

1. After dumping AFI Europe Romania by selling Floreasca Park & Lakeview last year, NEPI is fooling once again the Romanian real estate market with its portfolio of significant loss-making investments

  1. In 2020, NEPI Romania group recorded expenses of over 1.53 billion RON, with losses of 421 million RON. Significant losses, overvalued assets, and lack of perspective lead the management of NEPI Romania to take steps to protect themselves. At the same time, small investors are left with no guarantee of a return on investments and no protection against losses. For the last five years, NEPI has recorded consecutive annual losses. It can only survive if the company is financed by the money of the shares – mainly of small investors (below 0.75%) who hold a very high percentage of the shares – 50.3% of the total and a value of 2,170,262,676 USD. But without the right to decide!

I am also pleased to remember the comment left by Nepi Rockcastle Romania at one of the articles published on economic website, a comment that was signed with the “Ministry of Finance” nickname, which shows once again the creativity level of Nepi’s employees, which seems to be used everywhere – in accounting, in image/branding etc.

 Unfortunately, or fortunately – depending on which camp you are in, this is not followed by intelligence: the IP from which this comment was sent is very easily detectable – as being of Nepi’s Rockcastle Romania, as can be seen in the images below.

But it looks like the statement “Fake it until you make it!it’s not followed entirely by Nepi Rockcastle, because FAKE IT – we have, but MAKE IT – is completely missing.

 Also, it seems that Nepi is afraid that someone with more knowledge than the basic one has will find out their “little” financial secrets.

 But going back to the largest real estate developer in the CEE – as Nepi calls itself right on their website, for the year 2020, can you make a financial summary please?

Dr. Kristine Bago: Yes, financially speaking, we have the following case:

 At Group level – CEE: (established in 9 countries)

1. Financial Result – Loss = EUR 202,402,000

 2. Net rental and related income (after deducting the operating expenses connected to the fixed assets owned, but also the receivables partially “forgotten” due to the Covid-19 pandemic) = EUR 322,964,000 

  1. EBITDA (Operating Profit – after deducting the administrative expenses) = EUR 302,126,000

 SOURCE: Annual Report 2020_page 221

At Individual level – Romania: (43 companies) 

  1. Financial Result – Profit = EUR 13,604,000
  1. Net rental and related income (after deducting the operating expenses connected to the fixed assets owned, but also the receivables partially “forgotten” due to the Covid-19 pandemic) = EUR 133,001,000

SOURCE: Annual Report 2020_page 268

Reporter Finweek: So, the big “leader” in the CEE made a loss of over EUR 200 million in 2020 at Group level, and in Romania, the 43 companies under the Nepi’s brand, recorded in 2020 a low-level profit of only EUR 13.6 million. (profit made with the participation of only 9 companies – as you mentioned in the previous interviews, out of a total of 43 within Nepi’s Rockcastle Romania Group, being an annual average of EUR 1.5 million for each company – a small amount if we take in count the economic activity of this Group)

But what did Nepi Rockcastle Group in 2021?

 Dr. Kristine Bago: We are close to the end of the year, but of course no company has completed its financial statements now, as the reporting period is not yet complete.

Thus, for the whole year 2021 we can’t know yet, but we may know what happened financially at the interim.

 Reporter Finweek: Please define the term interim.

 Dr. Kristine Bago: Large companies are audited and they receive a report over the financial data at the middle of the reporting year, not only at the end of it.

 If the reporting year is defined by the period between 01.01.N-31.12.N, then the interim will represent the period between 01.01.N-30.06.N, (the first 6 months) as per Nepi Romanian’s Group case: 01.01.2021 -30.06.2021.

 Reporter Finweek: So, we have the financial data of Nepi Romanian’s Group as at 30.06.2021.

 Dr. Kristine Bago: Yes, please find the source here: Interim Financiar Report as at 30.06.2021.

 From the financial point of view, we have the following case for 2021:

 At Group level – CEE: (established in 9 countries) 

  1. Financial Result – Profit = EUR 140,030,000 EUR
  1. Net rental and related income (after deducting the operating expenses connected to the fixed assets owned, but also the receivables partially “forgotten” due to the Covid-19 pandemic) = EUR 154,919,000 EUR
  1. EBITDA (Operating Profit – after deducting the administrative expenses) = EUR 145,560,000

SOURCE: Interim Financial Report as at 30.06.2021_page 22 

  • At Individual level – Romania: (43 companies)
  1. Financial Result – Profit = EUR 79,853,000
  1. Net rental and related income (after deducting the operating expenses connected to the fixed assets owned, but also the receivables partially “forgotten” due to the Covid-19 pandemic) = EUR 68,272,000

SOURCE: Interim Financial Report as at 30.06.2021_page 58


Reporter Finweek Great! I have only two questions in this respect:

  1. How can you go from a loss of over EUR 200 million at Group level in 2020 to a profit of EUR 140 million in the middle of the next year – 2021?
  1. Regarding the situation in Romania, it is something that seems, at least for me, strange: It is possible to have a profit amount higher than turnover’s amount, in this case – the rental and related income?

And I am saying this taking in count also the fact that 2021 was the second year of the pandemic crisis, with lockdowns, the last part of the year I think it will be influenced also by the impact of the ban on non-vaccinated people to enter in the malls… 

How is it possible to grow so much when the whole ecosystem around you is falling? 

Dr. Kristine Bago: Yes, indeed, very good questions. I will explain below the reason behind them, but also the situation that created them.

First, the base of the profit meaning is represented by the turnover, that results from the activity of the company who makes it. 

Starting from this point, I have presented below the net rental income, but also other related income for both reporting years, because theoretically, if there is such a large variation between the financial results of 2 years in a row (loss and then profit), this difference should come from a healthy increase, resulted from the increase of the turnover (– e.g.: in this case, of the rental income) and / or the decrease of some major expenses.

I would also like to point out that comparisons at the P&L level (Profit and Loss Account) are made versus the same previous period, not versus the end of the year. (e.g.: as you can see in the table I made, in our case it is about 30.06.2020)

 Reporter Finweek: But if I look at your table, as I said above, due to health and economic crisis we are going through, the Turnover per Nepi’s Group did not increase in 2021 – it has decreased by 3%, (approx. EUR 5.3 million) as well as EBITDA – the Operating Profit. (approx. EUR 4.1 million)

 Dr. Kristine Bago: Yes, and I would like to talk a little bit about this Operating Profit, technically called EBITDA. (Earnings before interest, taxes, depreciation, and amortization)

 Anyone who wants to see the level of wealth of a business, and I am referring at any stakeholder – representing any interested part on the financial information provided by the entity (e.g.: investors, creditors, banks, shareholders, suppliers, customers, employees, etc.) looks first to this indicator, which shows in principle the profit before deducting the depreciation, the interest, the income tax expense, representing the amount that comes directly from the operating level – company’s activity, to which is then added the net result from financial investments, adjustments to the fair value of real estate investments, net financing costs, (for the loans acquired by the company) other adjustments related to financial instruments (derivatives, etc.), joint ventures, etc.

 Also, I want to add that in the Romanian accountancy (one of French inspiration), it is not required to compute this indicator – EBITDA (the Operating Profit), but as I mentioned, it is very important for any entrepreneur to know its value, having a strategic role in the financial management of any company.

 In the financial reporting as per International Standards (such as IFRS), EBITDA is mandatory.

 Reporter Finweek: So, if this indicator – EBITDA, has decreased by 3% in 2021 compared to 2020, when the Nepi’s Group recorded losses of over EUR 200 million, how is it possible that the final profit reported at the half of 2021 to be of EUR 140 million? If the net income / net turnover decreased?

 Dr. Kristine Bago: Here comes the beautiful part called creative accounting.

 As mentioned above, there are several non-monetary components that can be added to EBITDA (the Operating Profit), such as those set out above, which may influence the final amount of the reported profit, although this is not the amount to be taken into account when we want to know how a business has actually performed in a certain period.

 In fact, the final profit should be seen as a trash basket where everyone can “throw” several objects, but not everything that is inside is also useful.

 Reporter Finweek: How they did it? I am very curious.

 Dr. Kristine Bago: As it can be seen in the Profit & Loss Account below, EBITDA is followed by the non-monetary items set out above:

 The first difference is the P&L line “Fair value loss and net result on sale of financial investments at fair value through profit or loss” null in 2021.

(vs. 2020: –108,770,000 EUR)

 The other P&L lines such as: Net finance costs, Other items, being approximately the same as in the previous year.

 But what makes the difference in the first half of 2021, that turns the financial result of the period in a profitable one, is represented by the line “Fair value adjustments of investment property” in amount of EUR 25,453,000. (vs. 2020: -236,572,000 EUR)

 Reporter Finweek: That is a total of EUR 345,342,000, almost the entire difference you set out in the table against the financial results for the last 2 reporting periods. (30.06.2020 & 30.06.2021)

 But what do these 2 lines represent?

 Dr. Kristine Bago: True.

 The first line represents a trading made in November 2020, when the Group sold its entire portfolio of listed securities consisting of Unibail-Rodamco-Westfield (“URW”) shares, due to high prices of URW shares at that time. The proceeds resulted from the sale of URW shares were used to repurchase some NEPI Rockcastle shares, which were subsequently canceled.

 This transaction is considered as a write-off (for Nepi’s shares) and a one-off transaction, not being considered a regular one, therefore it is stipulated in this category Net Income from Financial Investments for 2020, outside EBITDA. (the Operating Profit)

 This transaction is not a part of Nepi’s Group business activity, because the main income of the Group comes from the rental of their premises, not from the sell of any shares acquired.

 This is the reason why we can’t rely on existing figures in these non-monetary categories in the future, because they are not a part of the business activity, and there is a high risk for any positive amounts (representing profit) to have no continuity in the future, being too volatile – by representing one-off transactions.

However, at the time when they occurred, according to International Reporting Standards, the amount of the final profit is influenced by them.

 The second line – and the most important, in my opinion, is represented by the adjustments to the fair values ​​of the real estate investments.

 The fair value of real estate investments is based on rental details that are made available to appraisers, including information on fully booked and free units, area and number of units, lease start and end dates, suspending and indexing options.

 All properties are inspected by external appraisers once a year.

 All real estate investments in use are valued using the income method in the case of Nepi. For the six-month period ended 30 June 2021 and the year ended 31 December 2020, respectively, the applied method used for all real estate investments in use was the discounted cash flow (‘DCF’).

 DCF uses assumptions about the benefits and liabilities over the life of the asset, including an exit or final amount.

 Reporter Finweek: But the term “assumption” is not necessarily equal to something that will become 100% real, as far as I know…

Dr. Kristine Bago: True, that’s why I said that these non-monetary elements that go into the “bucket” after the Operating Profit, are not necessarily elements that can guide us to have a fair financial overview of any company’s business activity, because we are not completely sure that they will become reality, given the fact that they come from some mathematical models, cash projections – in this case or one-off transactions. (as ocurred for the first line presented above)

 As accepted under the Income Valuation Method, the DCF method involves the forecasting of a series of cash flows on a real estate interest. For these series of forecasted cash flows, an appropriate market-derived discount rate is applied to determine the present value of future inflows associated with the property.

 The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent review, lease renewal and lease periods, new leasing, refurbishment or restoration.

 The proper period is usually determined by market behavior.

 Reporter Finweek: Again, a volatile element – especially in our times, the behavior of the market can change suddenly, or it can be changed suddenly even by the authorities, by setting up new restrictions.

 Dr. Kristine Bago: Exactly.

 In real estate investments case, the periodic cash flow is usually estimated as gross income less free spaces, sunk costs, collection losses, rental incentives, maintenance costs, commissions, but also other operating and management expenses.

 The series of net periodic inflows, combined with the estimated exit value at the end of the projection period, is then updated. For all real estate investments in use, current use is equivalent to the largest and best use.

Reporter Finweek: So, as a brief, this line of adjustments to the fair values ​​of the real estate investments has brought “down” the Nepi’s Group in 2020, but this year it “helped” them to make the desired profit, although the Turnover and Operating Profit (EBITDA) have decreased in the first 6 months of this year vs. the same period in 2020.

 And regarding the question related to the situation in Romania?

How can be the amount of the Financial Result – Profit higher than the amount of the Turnover?

 Dr. Kristine Bago: The answer is similar to above – all these non-monetary aspects that make up the “bucket” with profit, as I stated above for Group level.

 Reporter Finweek: Creativity, a highly developed skill for NEPI at any level…


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